Dealpolitik: The Winning Playbook for a Transatlantic Deal

Last week Transatlantic Holdings finally threw in the towel on its contentious merger with Allied World. But it turned out Transatlantic painted itself into a corner on this one, and the reinsurance company needs to tread carefully as it tries to pit its two remaining suitors against one another.

Here’s a playbook for how Transatlantic can take back control of the deal process — even if it may mean no deal at all.

First, the problems with the Allied deal. With 20/20 hindsight, a couple of deal terms from Allied look particularly thorny. Transatlantic agreed that any confidentiality agreement with a competing bidder needed to include a standstill agreement, which prevents a company from making an offer directly to shareholders or running a proxy fight without permission from the company being acquired.

Validus has refused so far to agree to the standstill Transatlantic proposed, which has meant Validus could not be provided with confidential information and make a firm bid. Transatlantic was left without a bid by Validus which could be accepted.

Transatlantic also agreed to a “force the vote” provision on the Allied World deal. Even if Transatlantic wanted to accept a competing deal, it still had to take the Allied deal to a shareholder vote before it could sign up for a rival offer. The practical effect of the force the vote requirement was to lock out all other bidders between June 12 and the scheduled September 20 shareholder vote.

So when Berkshire offered $52 a share for Transatlantic with a three-day deadline to accept, Transatlantic’s hands were tied. It would not have been able to sign that merger agreement —or one at an even higher price—for months. And Berkshire had no incentive to improve its bid during the months-long waiting period.

Where did that leave the Transatlantic board? With only one deal on which it could move forward. That was Allied’s, which Transatlantic liked in June and continued to like. It made no sense for the Transatlantic board to tell shareholders to vote “no” on the Allied offer.

A “no” recommendation would have given Allied the right to walk away from the deal with $115 million of Transatlantic’s cash. It could also have left Transatlantic with no deal for two months during a rocky stock market. Transatlantic, backed into a corner by its merger contract, took the bird in the hand rather than either than either of the two in the bush.

The path forward. What does the Transatlantic board do now? On Friday, Transatlantic sent a strong message that it was in control of its destiny and not desperate to do any deal. It said both Validus’ and Berkshire’s bids are too low. That is predictable. Here is one basic rule of M&A: If you say yes to a price without a signed contract, the price is going in only one direction—down—unless you can be sure there will be competing bids.

And here is another basic M&A rule: once a bidder is in the hunt and has named a price, it almost always is willing to pay something more if its hand is forced.

Transatlantic’s characterization of Berkshire’s bid is instructive. The $52 price is “at such a substantial discount to book value would not deliver fair value to stockholders,” Transatlantic wrote. Note that not all discounts to book are ruled out, just one at “such a substantial discount.” Would $55 do it? Who knows.

Berkshire, of course, is not your ordinary buyer. It is well known for avoiding bidding wars. But by again reiterating the same bid that already has been repeatedly rejected, Transatlantic can just cut-and-paste its no answer.

Playbook for Transatlantic. Here is my playbook for Transatlantic. It rests on the realization that if Berkshire can be made to pay more, Berkshire almost certainly won’t bid against itself until Transatlantic is ready to sign a definitive merger agreement.

To move forward, Transatlantic needs to sign up a confidentiality agreement with Validus. (Though if I were a Transatlantic director, I might not be inclined towards Validus and its tongue-lashing efforts to kick out the whole board.) Still, with the Allied straightjacket gone, it doesn’t need much of a standstill. Transatlantic’s poison pill will do most of the job without a standstill. (UPDATE: The Journal is reporting Transatlantic is exploring a limited standstill agreement with Validus.)

With a confidentiality agreement in place, Validus can review Transatlantic’s confidential financial information and complete its due diligence. Then Transatlantic can ask for Validus’ best bid.

With Validus’ best and final offer in hand (or at least what Validus says is its best), Transatlantic will be in a position to turn the tables on Berkshire. Transatlantic can name a price to Berkshire and say it is willing to sign by days’ end.

True, Berkshire doesn’t like bidding wars. But if Transatlantic can make a firm offer to Berkshire, Berkshire can make a rational decision on the merits of whether to “hit the bid” and buy Transatlantic. And if Berkshire says no, Transatlantic can either take Validus’ bid or just continue to fight its hostile offer.

(The author owns shares of Berkshire Hathaway.)

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Ronald Barusch spent more than 30 years as an M&A practitioner at Skadden, Arps, Slate, Meagher & Flom LLP before retiring last year. He is no longer affiliated with the firm and the views expressed here are his own.

Comments (1 of 1)

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